New Investments Will Improve Energy Efficiency And Reduce Costs

Key Takeaways

• Cost and efficiency gains from new investments are projected to enhance EBITDA per ton, positively impacting earnings and net margins.
  
• Strategic shifts to high-profit sectors and regulatory changes may strengthen competitive position, boosting revenue and market share.
  
• Economic uncertainties and high costs are squeezing profit margins, while capital investment needs may strain Erdemir's financial flexibility and stability.

Catalysts

Produces and sells iron and steel rolled products, alloyed and non-alloyed iron, steel and pig iron castings, cast and pressed products, coke, and by-products in Turkey and internationally.

• Erdemir expects cost reduction and efficiency gains from new investments in blast furnaces and coke factories, which are projected to improve EBITDA per ton from 2024 levels. This is likely to positively impact earnings and net margins.
  
• The company's energy efficiency investments are anticipated to further enhance EBITDA per ton, supporting financial performance by reducing operational costs and improving net margins.
  
• Erdemir's strategic pivot to higher profitability sectors is expected to drive better revenue outcomes, despite ongoing market challenges.
  
• Potential regulatory changes in Turkey regarding import duties and inward processing regimes may strengthen Erdemir's competitive position domestically, potentially boosting revenue and market share.
  
• Erdemir's planned Net Zero investments aim to increase crude steel capacity to 13 million tons by 2030, potentially driving significant revenue growth and improving long-term earnings.

Eregli Demir ve Çelik Fabrikalari T.A.S Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Eregli Demir ve Çelik Fabrikalari T.A.S's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.6% today to 10.6% in 3 years time.
• Analysts expect earnings to reach TRY 27.3 billion (and earnings per share of TRY 3.58) by about March 2028, up from TRY 13.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.2x on those 2028 earnings, up from 12.0x today. This future PE is lower than the current PE for the TR Metals and Mining industry at 25.6x.
• Analysts expect the number of shares outstanding to grow by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 34.2%, as per the Simply Wall St company report.

Eregli Demir ve Çelik Fabrikalari T.A.S Future Earnings Per Share Growth

Risks

• The significant decline in finished steel product prices due to weakening global demand, oversupply, and economic uncertainties has severely squeezed profit margins for producers, potentially impacting future earnings.
  
• High energy costs continue to put pressure on profit margins for European steel producers, which could affect Erdemir's net margins and profitability.
  
• The potential for trade restrictions and policy changes, such as China's external strategy and the EU's anti-dumping measures, could impact Erdemir's export revenues and overall market positioning.
  
• Fluctuating raw material costs, such as coking coal and iron ore, combined with geopolitical risks and logistical challenges, could lead to increased cost pressures affecting Erdemir's revenue and profit margins.
  
• The ongoing need for substantial capital investment, such as the planned $3.2 billion Net Zero Roadmap, could strain cash flow and financial flexibility, potentially impacting net margins and financial stability.

Valuation

• The analysts have a consensus price target of TRY27.539 for Eregli Demir ve Çelik Fabrikalari T.A.S based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of TRY37.0, and the most bearish reporting a price target of just TRY17.33.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be TRY257.1 billion, earnings will come to TRY27.3 billion, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 34.2%.
• Given the current share price of TRY23.1, the analyst price target of TRY27.54 is 16.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.